A lack of standardised and reliable data continues to pose a barrier to asset owners’ pursuit of ESG-linked investment strategies, according to a poll that nevertheless found surging incorporation of sustainability considerations in allocation decisions.
The latest and third annual Voice of the Asset Owner Survey by Morningstar found that almost 40 per cent of respondents cited data standardisation as one of the top-three hurdles to pursuing an ESG investment strategy, up from about 30 per cent in the past two years. Unreliable or out-of-date data was cited by 30 per cent as among their key obstacles. The top impediment cited was the impact on returns.
Even so, the survey suggested that in many ways asset owners were happier with their data, with two-thirds saying the situation had improved in the past five years.
Fragmented and often competing frameworks on ESG data has ensured that investors lack a single set of guides to help them build sustainability into their investment theses or construct risk and regulatory reporting processes. The situation is expected to change, with the International Sustainability Standards Board created under the IFRS Foundation to bring alignment of codes and regulators around the world implementing broadly similar reporting policies.
Morningstar Indexes head of ESG strategy ****Thomas Kuh ****said the study showed a mixed but generally positive outlook.
“Although most asset owners believe that ESG data, ratings, and indexes have improved over the past five years, they also acknowledge that room for improvement remains,” Kuh said in the report.
Mission Critical
Raw data remains more important to asset owners than ratings or indexes, with those preferences greatest among Western respondents.
Of the quality of ESG information, the biggest improvements over the past five years were seen in data, with two thirds saying it had improved, while just over half said ratings and indexes were better. Roughly equal proportions – around a 16 per cent – said each had worsened.
Respondents cited a plurality of improvements they like to see in data, ratings and indexes. Accuracy, standardisation and completeness of data topped the shopping list of wants among asset owners, with around 40 per cent nominating each. The survey suggested there was least appetite for more broad market and thematic indexes.
Less Gloom
While the findings suggest some improvement in longstanding ESG data challenges, they did show that there is growing interest in sustainability investing among asset owners.
The proportion of respondents who said sustainability had become more material to them in the past five years climbed to 67 per cent, with just 13 per cent saying it had become less important. Also it found that the 42 per cent of assets under management had ESG considerations applied to them, up from 41 per cent last year and 38 per cent in 2022.
The study, which questioned 500 asset owners with combined assets under management of US$18 trillion, found that every respondent said they had at least some of their assets committed to sustainability-linked investments. Those committing all their allocation rose for a third-consecutive year, as did the number of owners that had put more than half of their asset value into ESG investments. The biggest driver for the turnaround was senior management leadership followed by local regulations.
The findings may indicate the waning of a pushback against ESG that began three years ago and has led to withdrawals from sustainability funds.
“As long-term investors, asset owners are increasingly prioritising ESG factors for managing risk, meeting regulatory and fiduciary requirements, aligning with stakeholder expectations, and in some cases, considering the broader impact of their investments on the world,” the report concluded. “For asset owners, investment firms, asset managers, and financial analysts, understanding these trends is crucial for staying competitive and meeting stakeholder expectations.”
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